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Federal Reserve officials are weighing two competing forces in the U.S. economy: the resilience of the consumer versus the fallout from uncertainty around trade disputes and weaker global growth.
“The consumer is now carrying all of the weight, or much of the weight, for growth going forward,” Federal Reserve Bank of New York President John Williams (NYSE:WMB) told reporters Wednesday after giving a speech in New York. “One thing, though, about consumer spending that you have to be careful about is it’s not really a leading indicator.”
As threats from U.S.-China trade tensions have chilled business confidence and investment, consumers have been the main drivers of growth. There’s weakness surfacing in manufacturing and concerns brewing in financial markets that the world economy may be heading toward recession.
The theme was echoed later on Wednesday by Dallas Fed chief Robert Kaplan, who told an audience in Toronto that he was watching to see if weak macroeconomic data filter into consumer attitudes. Kaplan, who isn’t a voter on the Federal Open Market Committee this year, said that if policy makers wait for consumer spending to weaken, it might be too late.
The Fed cut interest rates by a quarter percentage point when they last met in July, citing slowing global growth, trade policy uncertainty and muted inflation. They are expected to deliver another reduction when they next meet Sept. 17-18, according to prices of federal funds futures contracts.
Williams, as vice chair of the FOMC, is a key policy maker on the 17-strong committee of U.S. central bankers, who are split on the need for more easing, according to recent public statements. He pointed to the effects of U.S. President Donald Trump’s trade war with China, indicating it has cast a chill over the business community. Trump has repeatedly called for the Fed to cut rates, breaking with a quarter-century of tradition in which the president typically refrained from commenting on Fed policy in public.
Stock Performance
Trump acknowledged Wednesday that the clash with China has hurt the performance of the U.S. stock market, but said he had to confront that country’s economic practices.
“If I wanted to do nothing with China, our stock market, our stock market would be 10,000 points higher than it is right now but somebody had to do this,” Trump told reporters at the White House on Wednesday.
In separate remarks Wednesday, Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans highlighted the impact of trade policy on the economy. Tariffs are "really concerning" businesses, Kashkari said during a town-hall style meeting in Minnesota. Evans noted that uncertainty tends to slow down decisions by businesses "weighing whether or not to make substantial investments."
Beige Book
A Fed survey released Wednesday, known as the Beige Book, described consumer spending as “mixed.”
The report, based on anecdotal information collected by the 12 regional Fed banks through much of July and August, found that auto sales grew modestly and tourism was generally solid. But manufacturing was down slightly, housing sales remained constrained and transportation activity, which includes trucking, softened as a result of “slowing global demand and heightened trade tensions.”
Williams said that policy makers have seen a lot of parts of the economy outside of consumer spending slow.
“We’ve really seen some slowing in business investment. We’ve seen slowing in export growth. We’ve seen slowing in manufacturing,” Williams told reporters, adding that those indicators are “maybe giving a little bit more of an indication of where things are going.”
In his speech, the New York Fed chief pointed to deterioration in U.S. manufacturing a day after a closely-watched report from the Institute for Supply Management suggested the sector had contracted in August, for the first time in three years.
“Robust consumer spending is balanced by signs of slowing business investment,” Williams said. “I am carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth, a strong labor market, and a sustained return to 2% inflation.”